Restructuring

The de-regulation of today’s electricity markets has changed the business arrangements for providing electricity to consumers.  As a result, the issue of whether electricity is a “good” entitled to administrative expense status under section 503(b)(9) of the Bankruptcy Code has received increased attention from bankruptcy courts in recent years.  A prior post covered one of these recent decisions.  Today’s post covers a decision from the United States District Court for the Southern District of New York, which when presented with the question, “Is electricity a ‘good?’” answered, “Maybe.”  In doing so, the court highlighted that the “nature of electricity” is not an established truth.  Its decision is instructive on the facts that courts consider when determining the issue.
Background
In Hudson Energy Services, LLC v. The Great Atlantic & Pacific Tea Company, Inc. (In re Great Atlantic & Pacific Tea Company, Inc.), Hudson filed a motion for allowance of administrative claim pursuant to section 503(b)(9) of the Bankruptcy Code, seeking priority for $875,943.90 in electricity sold to A&P and its affiliates in the 20 days prior to the commencement of the bankruptcy case.  Hudson was a “non-utility supplier of electricity” – it bought electricity from generators at a lower price than that at which it sold to customers, but did not perform delivery service.
The only issue in dispute was whether the electricity that Hudson provided A&P and its affiliates was a “good” within the meaning of section 503(b)(9) of the Bankruptcy Code.
The bankruptcy court denied Hudson’s request for administrative priority pursuant to section 503(b)(9), concluding that electricity did not “clearly fall” within the definition of “goods” under that section and relying, in part, on the principle that administrative expenses “must be tightly construed” and “clearly fit within the statute’s provisions” to be accorded priority treatment.  The bankruptcy court based its decision on the parties’ written submissions and oral arguments.  It did not conduct an evidentiary hearing before ruling.
District Court’s Analysis
First, the district court reviewed the bankruptcy court’s analysis of what exactly constitutes a “good” within the meaning of section 503(b)(9).  The term “good” is not defined in the Bankruptcy Code.  Courts, including the bankruptcy court in A&P, look to the Uniform Commercial Code for the operative definition.  Article 2 of the UCC defines “goods” as “all things … which are movable at the time of identification to the contract for sale. . . .”  The district court found that the bankruptcy court (and numerous other courts to have considered the issue) did not err in holding that Article 2 of the UCC should provide the definition of “goods” for the purpose of interpreting section 503(b)(9).
Next, the district court considered the bankruptcy court’s finding that electricity does not fall within the UCC’s definition of goods.  Specifically, the bankruptcy court found that electricity is not “actually movable at the time of identification” because it “disappears into use at th[e] moment” it reaches the meter; rather, electricity is “simply a stream of electrical energy . . . identified . . . at the point of delivery.”  Because the factual record on which the bankruptcy court relied in making determinations about the nature of electricity consisted only of counsel’s assertions that were uncorroborated by testimony or other evidence and were disputed, the district court found there was an insufficient basis for it to agree with the bankruptcy court’s factual findings.
The district court wrote that it “simply need[ed] to know more about the delivery of electricity in th[e] case to determine whether the electricity supplied by Hudson meets the UCC definition of goods either at the generator’s meter, at the customer’s, or within the grid.”  The district court suggested that if the electricity passes through the meter at the customer’s location and is at that moment identified and thereafter consumed, it would meet the definition of “good” in the UCC.  Thus, the district court vacated and remanded the case to the bankruptcy court to conduct an evidentiary hearing for further factual development.
The district court took particular issue with A&P’s argument that an evidentiary hearing was unnecessary because the nature of electricity is a constant or legislative fact.  In explaining why this was not so, the district court observed that, in today’s deregulated market, there are many different economic or business arrangements governing the supply chain of energy from generator to consumer.  Individualized assessments of these arrangements may be necessary to determine whether the electricity sold in a given case is a “good.”  Although an individualized fact-finding – regarding the nature of the claimant’s business, how it physically provides the electricity, its arrangements with generators, etc. – may be less desirable than a bright-line rule that electricity is or is not a “good,” the district court suggests it may be what section 503(b)(9) requires.
Conclusion
The district court’s observation that the nature of electricity – at least as interpreted by courts considering whether it is a “good” for purposes of section 503(b)(9) – is unresolved is borne out by the varying conclusions that courts have reached. The first two courts to consider the issue determined that electricity is not a good for purposes of administrative expense priority under section 503(b)(9), while several more recent published decisions have reached the opposite conclusion.  Compelling arguments about whether electricity, by its nature, falls within the UCC definition of a “good” have been made by both sides.  Going forward, it looks like the physical nature of electricity and the particular business arrangements for providing electricity will take center stage in the debate.